The present invention relates generally to an electronic brokerage system having a communication network connecting traders dealing in financial instruments, and more particularly to a computerized system for coordinated trading of multiple instruments such as different tenors of forward rate agreements for the same currency.
Commonly assigned U.S. Pat. No. 5,375,055 (Togher et al) discloses an automated matching system for anonymous trading of foreign currencies in which traders may enter bids and offers through trader workstations into a distributed matching system. Credit limits, set by the potential parties to a transaction, are stored at Market Access Nodes to which the workstations are connected. The credit limits are analyzed as part of the deal completion procedure, and deals which would exceed the credit limits are inhibited. The Market Access Nodes are linked to one or more Arbitrators and to one or more Market Distributors. The Market Distributors"" function is to distribute prices of open bids and offers using a Pre-Authorization Matrix derived from credit limits stored at the Market Access Nodes. The Pre-Authorization Matrix is used to inhibit trades between incompatible counterparties and also to screen bids/offers prior to display so that bids/offers shown to a trader are xe2x80x9cdealablexe2x80x9d, that is, there is credit available to the trader to at least partially deal the displayed quote. An improved version of this system is also known and implemented as the EBS system for anonymous dealing of spot foreign exchange transactions.
The known EBS system also includes a provision for establishing minimum and maximum amounts for any single trade by a particular trader and for establishing a default price (based on current market conditions) and amount (based on trader preference) for a single proposed trade which the trader can adjust upwards or downwards before submitting to the market for possible acceptance of other traders with whom he has bidirectional credit.
We have appreciated, however, that while many aspects of such a spot trading system are also applicable to the trading of derivatives, the derivatives market is more segmented in terms of the particular xe2x80x9ctenorsxe2x80x9d being traded for a particular currency or other commodity, and as a result, a trader will frequently want to enter alternative proposals for a particular commodity, differing only by settlement date, gap, or other settlement terms. However, because of the fast response times inherent in an automated trading system, it is not feasible for a trader to enter the alternate proposals into the known trading system as separate orders without risking more than one such order offer being accepted before the remaining orders can be manually canceled. The situation is further exacerbated if only part of an outstanding order is accepted and/or if different orders have different associated risks or limits, so that more is required than simply canceling one order if an alternate related order is accepted.
Accordingly, there is provided an improved computerized trading system for trading financial instruments or other commodities between traders at trader terminals, wherein the trading system facilitates manual entry and possible revision of a group of related orders for derivatives based on a common underlying currency or other commodity. In particular, the group of orders may optionally be made be subject to a common order limit whereby all the related orders are automatically reduced whenever one such order is accepted. This gives a degree of control and flexibility not provided in the prior art noted above, providing greater market liquidity and flexibility of terms to potential market participants without appreciably increasing the potential exposure assumed by the market maker responsible for the multiple orders.
In one embodiment, the group of related orders are selected from a respective xe2x80x9csheetxe2x80x9d of different xe2x80x9ctenorsxe2x80x9d for forward rate agreements in the same side of the market and involving the same currency, the same gap, and the same reference rate. However, without departing from the spirit of the present invention, several such groups may combined under a single order limit, and/or the same or a combination of such groups may be subject to multiple, possibly overlapping credit limits.
In another embodiment, the sizes of the different tenors subject to a combined order limit are normalized in accordance with defined differences between the different tenors of the same group, such as gap or minimum deal size (notional amount), conventionally associated with each individual tenor.
Preferably, the available amount associated with a particular order limit is initially set above a predetermined minimum notional amount applicable to all the selected tenors in the associated group, regardless of exposure, and is automatically adjusted as the individual orders for those particular tenors are matched, completed, or re-entered. As each such adjustment to the available amount is made, the notional amounts for all of the other individual open orders subject to that same order limit are also compared with the adjusted available amount, possibly taking into account not only the actual notional amounts involved but also the relative exposure associated with each tenor and/or other market conventions used to xe2x80x9cnormalizexe2x80x9d the minimum notional amounts frequently associated with different tenors, such as a xe2x80x9c3-month equivalentxe2x80x9d.
It should be noted that the embodiment described later is one in which the functions of the network are distributed throughout a variety of components. This is considered to be the most effective manner of implementing the system. However, it will be appreciated that it would possible to incorporate this functionality into a system with a single location for all these functions, or into another system architecture having some aspects of a fully distributed system and some aspects of a fully centralized system.